1. FIMA Research Center, University of Hawai'i 1 Regional Bond Markets: Rationale and Roadmap S. Ghon Rhee K. J. Luke Distinguished Professor of Finance Executive Director Asia-Pacific Financial Markets Research Center University of Hawai ‘ i Boao Forum for Asia Annual Conference 2003 “Asia Searching for Win-Win: Development through Cooperation” November 2--3, 2003 Boao, Hainan Province, China

2. FIMA Research Center, University of Hawai'i 2 Two Questions 1.How much are Asian bond market activities integrated with global market activities? 2.Why do we need a regional bond market?

3. FIMA Research Center, University of Hawai'i 3 Reality Check of Regional Bond Market Activities (I) Fact 1: Active Participation of Asian Investors in Asian Bond Issues  71 bonds (US$41.2 billion) issued by Asian borrowers in April 1999-August 2002  44%-46% of these bonds were purchased by Asian investors Source: BIS Study (2002)

4. FIMA Research Center, University of Hawai'i 4 Reality Check of Regional Bond Market Activities (II) Fact 2: Active Participation of Asian Borrowers/Investors in Singapore Bond Markets  Bonds Issued in 2002 S$-bonds: S$3.22 Billion S$-bonds: S$3.22 Billion (27% by Asian Issuers) Non-S$ bonds: US$11 billion Non-S$ bonds: US$11 billion (40% by Asian Issuers) (40% by Asian Issuers)  Who are the Buyers? Source: MAS

5. FIMA Research Center, University of Hawai'i 5 Reality Check of Regional Bond Market Activities (III) Fact 3: Active Participation of Asian Investment Banks in International Bond Issues  Borrowers from 6 Asian counties raised US$53 billion, 1991-2001  1/3 of these issues: Asian Investment Banks Source: Park & Bae (2002)

6. FIMA Research Center, University of Hawai'i 6 Reality Check of Regional Bond Market Activities (IV) Fact 4: Tokyo Market Fails to Serve Region ’ s Financing Needs  Foreign Currency-Denominated Bonds Virtually Non-Existent  Limited Role of the Yen-Denominated Bond Market during the East-Asian Financial Crisis Source: Rhee (2001)

7. FIMA Research Center, University of Hawai'i 7 Gaisai Bond Market In Japan Unit: ¥ trillion Unit: ¥ trillion Number of Samurai Number of Shogun Number of Samurai Number of Shogun Year Issues Bonds Issues Bonds Year Issues Bonds Issues Bonds 1991 27 0.71 1 0.41 1991 27 0.71 1 0.41 1992 37 1.57 0 0 1992 37 1.57 0 0 1993 49 1.23 1 0.59 1993 49 1.23 1 0.59 1994 60 1.26 0 0 1994 60 1.26 0 0 1995 85 2.11 0 0 1995 85 2.11 0 0 1996 154 3.79 0 0 1996 154 3.79 0 0 1997 66 1.58 0 0 1997 66 1.58 0 0 1998 10 0.15 0 0 1998 10 0.15 0 0 1999 24 0.87 0 0 1999 24 0.87 0 0 2000 63 2.38 0 0 2000 63 2.38 0 0 2001 47 1.55 0 0 2001 47 1.55 0 0 2002 29 0.64 0 0 2002 29 0.64 0 0 Source: Japan Securities Dealers Association Source: Japan Securities Dealers Association

8. FIMA Research Center, University of Hawai'i 8 Reality Check: Foreign Holdings of US Treasury Securities (VI)

9. FIMA Research Center, University of Hawai'i 9 Findings from Reality Check 1.Regional and global bond market activities are more integrated than normally perceived 2.Participation of Asian investment banks is significant 3.At least 40% of Asian bonds end up in Asian Portfolios Why Do We Need a Regional Bond Market?

10. FIMA Research Center, University of Hawai'i 10 Regional Bond Markets Are Justified for Two Reasons Two Major Factors 1.Asian Common Currency 2.Credit Enhancements for Region ’ s Borrowers

11. FIMA Research Center, University of Hawai'i 11 Asian Common Currency Lessons from EU: Major Benefit of the Euro for Europe ’ s Bond Markets Lessons from EU: Major Benefit of the Euro for Europe ’ s Bond Markets i.Elimination of Exchange Risk ii.Harmonization of Market Practices iii.Re-denomination of European Government Bonds in Euro …. A bigger, deeper, more liquid, and more homogeneous European bond market Full or Partial Currency Unification in the Region :Coordinated Monetary and Fiscal Policies? Full or Partial Currency Unification in the Region :Coordinated Monetary and Fiscal Policies? Regional Efforts are Missing!

12. FIMA Research Center, University of Hawai'i 12 Credit Enhancements (I) Taniguchi Proposal (2003): ADB and JBIC serve as credit enhancing organizations? Asian Bond Fund (ABF) by EMEAP (2003) Useful only for Demand Side of Equation but Too Small Ito Proposal (2003): Asian Basket Currency (ABC) Bonds Good Idea but Operational Framework Missing

13. FIMA Research Center, University of Hawai'i 13 Credit Enhancements (II): Creation of Asian Bond Bank Modeled After the Municipal Bond Banks in Canada and the United States Successful Examples: a.Bond Bank of Alaska b.Municipal Finance Authority of British Columbia Source: Rhee and Stone (2003)

14. FIMA Research Center, University of Hawai'i 14 Asian Bond Bank (III) Major Benefits of ABB 1.Economies of Scale in borrowing cost 2.Greater liquidity with larger size bond issues 3. “ Credit rating arbitrage ” : ABB re- lends funds raised at its higher credit rating to participating Asian borrowers through structured debt issuance

15. FIMA Research Center, University of Hawai'i 15 Asian Bond Bank May Implement One or More Credit Enhancing Programs A.Internal Enhancements a.Cash Reserves b.Structured Bond Issue: Collateralized Bond Obligations c.Sinking Funds

16. FIMA Research Center, University of Hawai'i 16 Asian Bond Bank (V) B.External Enhancement i. Third-party Guarantees: Multilateral Financial Institutions ii.Letters of Credit: Commercial Banks iii. Bond Insurance: Monoline Municipal Bond Insurers C.ABB Bears Foreign Exchange Risk

17. Thank You! For Further References, Please visit http://www2.hawaii.edu/~rheesg